Application of Just-In-Time Principles to Financial Services

Transcription

1 University of the Aegean Business School Department of Financial and Management Engineering Application of Just-In-Time Principles to Financial Services Olga Manou Supervisors: Ioannis Minis and Vassilis Gliatis Chios, 2007

2 To my parents

3 Acknowledgments First, I would like to thank my Professor Ioannis Minis for giving me the opportunity to undertake the present diploma thesis and for his valuable supervision and guidance. I gratefully thank my supervisor Vassilis Gliatis, Ph.d candidate of the University of the Aegean, for all the time he was willing to spend with me and for his valuable guidance during the elaboration of the present diploma thesis. His support was really significant to me. Furthermore, I m grateful to Professors Ioannis Sakellariou, Mixail Bidalis as well as to Theodore Athanasopoulos, Ph.d candidate of the University of the Aegean, for their valuable advices and guidance during the simulation experiments. I would also like to acknowledge the support and resources made available to me through the DeOPSys Lab personnel of the Department of Financial and Management Engineering. Finally, I would like to thank my family and my true friends, Eleni, Kalousa, Marilena, and Trifon for their understanding, patience, and support all those years. Their presence was vital to my personal and academic life.

4 Contents 1. Thesis Motivation and Objectives Just-In-Time (JIT) Methodology Origins of JIT JIT Objectives The Pillars of JIT Implementation of Flow Implementation of Pull Cellular Manufacturing Quality at the Source An Overview of Financial Services Characteristics of Services Types of Financial Services Types of FS Providers Distinguishing Characteristics of FSs Differences between Manufacturing and FSs Operations JIT in Financial Services Case Study: JIT Application in Banking Services Loan Approval Simulation Model Description of the Simulation Models The Product Structure The Threshold Structure The Lean Structure Lean Performance Indicators Analysis of the Simulation Results Performance Evaluation between the Different Types of Structures under High and Low Capacity Performance Evaluation of the Lean Structure against Progressive Reduction of Rework Conclusions...54

5 5. Conclusions and Directions for Future Research...56 References...58 Appendix A...65 A. 1. Common Types of Kanban Systems...65 Two Card Kanban System...65 Constant Work In Process (CONWIP)...67 Other Kanban Card Systems...69 A.2 Types of Kanbans...70 A.3. Example of leveling production...74 Appendix B...75 Time Definitions...75 Appendix C...79 C.1. Types of Financial Services...79 C.2 Types of Financial Services Providers...88 Appendix D...98 Appendix E

6 List of Figures Figure 1.1: Comparison of performance between financial services and manufacturing...2 Figure 2.1: The JIT Element...7 Figure 2.2: A U-shaped Cellular Layout...14 Figure 4.1: Equivalence between Real System and Simulation Model...31 Figure 4.2: The Product Structure...33 Figure 4.3: The Threshold Structure...37 Figure 4.4: The Lean Structure...40 Figure 4.5: Cycle Time under High Capacity...44 Figure 4.6: Cycle Time under Low Capacity...44 Figure 4.7: % of Value Added Time under High Capacity...45 Figure 4.8: % of Value Added Time under Low Capacity...45 Figure 4.9: Level of WIP under High Capacity...46 Figure 4.10: Level of WIP under Low Capacity...46 Figure 4.11: The Resource Utilization under High Capacity...47 Figure 4.12: The Resource Utilization under Low Capacity...47 Figure 4.13: Average Productivity Ratio per Employee under High Capacity...48 Figure 4.14: Average Productivity Ratio per Employee under Low Capacity...48 Figure 4.15: The Cycle Time of the Lean Structure under High Capacity...49 Figure 4.16: The Cycle Time of the Lean Structure under Low Capacity...50 Figure 4.17: The % of VA Time of the Lean Structure under High Capacity...50 Figure 4.18: The % of VA Time of the Lean Structure under Low Capacity...51 Figure 4.19: The Level of WIP of the Lean Structure under High Capacity...51 Figure 4.20: The Level of WIP of the Lean Structure under the Low Capacity...52 Figure 4.21: The Resource Utilization of the Lean Structure under High Capacity...52 Figure 4.22: The Resource Utilization of the Lean Structure under Low Capacity...53 Figure 4.23: The Productivity Ratio of the Lean Structure under High Capacity...53 Figure 4.24: The Productivity Ratio of the Lean Structure under Low Capacity...54 Figure A.1: A Kanban Control System with two Workstations in Series...63 Figure A.2: Differences between Kanban and CONWIP...68

7 Figure A.3: Production Ordering Kanban...71 Figure A.4: Withdrawal Kanban...71 Figure A.5: Triangle Kanban...73 Figure A.6: Supplier or Vendor Kanban...73 Figure E.1: The simulation model of the Product Structure 119

8 List of Tables Table 2.1: Basic Differences between Pull and Push Manufacturing...10 Table 3.1: Classification of the Types of the FSs Table 3.2: Classification of the Types of the FSs according to NAICS...22 Table 3.3: Classification of the Types of the FS providers...23 Table 3.4: Applicability of JIT elements in FSs...27 Table 4.1 : The Types of Loans and the Daily Demand...31 Table 4.2: The Simulation List Data of the Product Layout...34 Table 4.3: The Scheduled Number of Servers in the Product Layout...35 Table 4.4: The Simulation List Data of the Threshold Layout...38 Table 4.5: The Scheduled Number of Servers in the Threshold Layout...38 Table 4.6: The Scheduled Number of Servers in the Lean Layout...39 Table 4.7: The Lean Performance Indicators...41 Table 4.8: Performance Evaluation between the Different Types of Layouts under High and Low Capacity...42 Table 4.9: Performance Evaluation of the Lean Layout against Progressive Reduction of Rework...43 Table B.1: Time Definitions...75 Table C.1: Types of FSs Table C.2: Types FSs according to NAICS...83 Table C.3: Types of FSs Providers Table D.1: The CT per Product under High Capacity with no Rework Table D.2: The CT per Product under High Capacity with Rework Table D.3: The % of VA Time per Product under High Capacity with no Rework Table D.4: The % of VA Time per Product under High Capacity with Rework Table D.5: Level of WIP per Product under High Capacity with no Rework Table D.6: Level of WIP per Product under High Capacity with no Rework.102 Table D.7: The Resource Utilization under High Capacity with no Rework Table D.8: The Resource Utilization under High Capacity with Rework Table D.9: The CT per Product under Low Capacity with no Rework..105

9 Table D.10: The CT per Product under Low Capacity with Rework Table D.11: The % of VA Time per Product under Low Capacity with no Rework.107 Table D.12: The % of VA Time per Product under Low Capacity with Rework. 108 Table D.13: The Level of WIP per Product under Low Capacity with no Rework 109 Table D.14: The Level of WIP per Product under Low Capacity with Rework 110 Table D.15: The Resource Utilization under Low Capacity with no Rework 111 Table D.16: The Resource Utilization under Low Capacity with Rework..112 Table D.17: The CT per Product of the Lean Structure under Low Capacity.113 Table D.18: The % of VA Time per Product of the Lean Structure under Low Capacity Table D.19: The Level of WIP per Product of the Lean Structure under Low Capacity Table D.20: The Resource Utilization of the Lean Structure under Low Capacity 116 Table D.21: The CT per Product of the Lean Structure under High Capacity with 50% Reduced Rework Table D.22: The % of VA Time per Product of the Lean Structure Under High Capacity with 50% Reduced Rework Table D.23: The Level of WIP per Product of the Lean Structure under High Capacity with 50% Reduced Rework..118 Table D.24: The Resource Utilization of the Lean Structure under High Capacity with 50% Reduced Rework

10 Abstract This thesis investigates the application of selected Lean Manufacturing concepts to Financial Service operations. First, it overviews the methodology of Just-in-Time in manufacturing applications with emphasis in the Quality at the Source and Cellular Organization techniques. Second, it discusses characteristics of the Financial Services Sector and distinguishing differences from manufacturing. Existing implementations of the JIT methodology to financial services are also presented. Finally, the thesis examines the results of applying the Just-in-Time techniques of Quality at the Source and Cellular Organization to financial services, using simulation experiments. The results reveal if these techniques applied to financial service operations with certain characteristics can increase significantly productivity, by reducing simultaneously cycle time and resource utilization.

11 1. Thesis Motivation and Objectives 1. Thesis Motivation and Objectives Financial Services (FSs) are recently attracting growing interest due to the competitive pressures resulting from the globalization through numerous mergers, the distribution of their products and services through alternative channels and their shift from products to customers. Thus, banks that provide a wide range of financial services, are dealing with complex processes as well as complex systems that impede productivity and increase operational costs. In fact, banks are becoming less efficient than the recent past; the huge investments in Information Technology systems oftentimes increase complexity and may not result in expected ROIs (Nallicheri, et al 2004). Many researchers are focusing on this sector in order to improve the performance of financial services and reduce associated costs. Researchers hope that financial services can reap similar benefits to those of manufacturing, and seek to close the gap in productivity between financial institutions and manufacturing industries, that borders on 60% (see Figure 1.1). However, services have significant differences from manufacturing and advances in the management of manufacturing systems (e.g. lean manufacturing) cannot be applied directly in the service sector. A major program in the DeOPSyS Lab of the University of the Aegean is investigating lean banking, i.e. the application of lean principles in banking. Within this concept, the current work focuses on Just-in-Time (JIT), which is one of the important tools of lean manufacturing, and aims to examine the applicability of the JIT technique to banking operations. Specifically, the current thesis focuses on the two specific JIT techniques: Cellular Design and Quality at the source and aims to quantify and analyze the results of their implementation in banking operations. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 1 of 132

12 1. Thesis Motivation and Objectives Figure 1.1: Comparison of performance between financial services and manufacturing (source: Closing the Productivity Gap Lean Manufacturing for Banks, (Booz Allen Hamilton Publications, 2002)) The structure of this thesis is as follows: Chapter 2, introduces JIT, and discuses its origins, principles, tools and guidelines. Moreover, the process for implementing JIT is presented. Chapter 3 discusses the definition of FSs, their types as well as the types of FSs providers. Furthermore, it presents the significant differences between manufacturing and FSs. Finally it summarizes existing applications of JIT to FSs and overviews relevant examples from the literature. In Chapter 4, we apply selected JIT techniques to the Personal Loan Approval Process. We analyze the Current State though a simulation and by analyzing the results, we draw conclusions for the Future State. Finally, in Chapter 5 the conclusions of this research are presented along with directions for further research. In the appendices of this Thesis for the sake of completion we have included useful material from the literature that is related directly to this work. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 2 of 132

13 2. Just-In-Time (JIT) Methodology 2. Just-In-Time (JIT) Methodology This chapter aims to overview the Just-in-Time methodology. First, a brief description of the history of JIT is presented in the subsequent sections, further analysis of JIT is discussed in the next sections; special emphasis is given to cellular design and quality at the source Origins of JIT JIT is a manufacturing philosophy, which seeks to eliminate the ultimate source of waste; Variability, in all of its forms through out the producing processes, from purchasing through distribution. By eliminating waste, JIT targets production with the minimum lead-time and at the lowest total cost. The JIT philosophy has its roots after World War II when the Japanese were striving to compete with the U.S. manufacturing system (also known as Mass Production). Taichi Ohno was the founder of this philosophy in the 1940s when he began developing a system that would enable Toyota to compete with U.S. automakers. Note that the environment dominating U.S. manufacturing over the last five decades has been based on the Material Requirements Planning (MRP) formalized by Joseph Orlicky, Oliver Wight, and George Plossl. In an MRP environment, planning is performed based on the independent (customers ) demand, in an almost JIT basis. However, shop floor control is performed based on a push philosophy in which manufacturing orders are introduced in the system and pushed through production. This is the fundamental difference between JIT and MRP. According to Ohno JIT rests on two pillars: 1. Just-in-time as it is described in the following chapters and 2. Autonomation or automation with human touch. This term refers i) to the installation of one-touch automation so an operator will be able to place a part in a machine, initiate the machine cycle, and move on and ii) fool proofing or poke yoke which is the incorporation of sensors in the machines to signal abnormal conditions and even automatically stop machines if necessary, so operators don t need to watch machines during their cycle (Hopp and Spearman, 2001). UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 3 of 132

14 2. Just-In-Time (JIT) Methodology Ohno formulated the whole idea based on two concepts he encountered during visits in the U.S.: An American supermarket and the cable cars in San Francisco. First, he was impressed by the way American supermarkets supplied merchandise in a simple, productive and, timely manner and attempted to develop a similar concept in manufacturing. Each workstation would become the internal customer for the preceding workstation. The former would simply pick up the required parts from the latter, a supermarket shelf. The second concept was analogous to a simple cable car operation. Ohno observed that the cable car riders were pulling an overhead cord when they wanted to disembark. This cord produced a similar sound signaling the cable car to stop the car. Ohno applied a similar system using machine sensors. An operator will stop the operation of a machine using a cord whenever he/she found a problem (autonomation) (Black and Hunter, 2003). Another contributor to JIT was Shigeo Shingo, who developed a new methodology for the reduction of setup time. This new method, called Single-Minute-Exchange-of- Dies (SMED) system, seeks to simplify and minimize the time required for the process of changeovers, so setups become simple and fast (Black and Hunter, 2003). The success of the JIT also rests on the principle of respect for humanity. According to Sugimori (1977), the Toyota Production System (TPS) makes full use of the workers capabilities and relies fully on them for the running and continuous improvement of the plant JIT Objectives The goal of JIT is to create a production environment that enables the customer to purchase products needed at the required time and quantity needed, in a predefined quality, at the lowest cost. This is accomplished by reducing variability in all of its forms. Thus, JIT focuses on reducing seven commonly accepted wastes as follows: 1. Overproduction, is prevented by a) synchronizing all processing steps by using the Pull philosophy and the kanban technique and b) by reducing set-up times UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 4 of 132

15 2. Just-In-Time (JIT) Methodology 2. Waiting, is prevented by a) synchronizing all processing steps by using the Pull philosophy and the kanban technique and b) organizing production in Cells 3. Transport of materials, is prevented by organizing production in Cells 4. Rework processing, is prevented by a) applying quality at the source and b) redesigning processes 5. Unnecessary inventory is prevented by a) synchronizing all processing steps by using the Pull philosophy and the kanban technique and b) by reducing setup times 6. Unnecessary movement of employees is prevented by organizing production in Cells 7. Production of defective parts is prevented by a) applying quality at the source and b) redesigning processes Central themes of JIT are Flow in Production and Pull of Production. Flow is the idea of processing one single item at a time in a continuous way from raw material to finished product without interruptions, delays, defects or breakdowns. Pull as the concept of responding to customer demand by delivering parts to assembly, and finished products to customers in a Just-in-Time fashion. The number of orders that are provided to the system is strictly determined by the system s capacity. In this manner, the levels of WIP between the workstations are explicitly limited and as a result, the system overloads are avoided (Black and Hunter, 2003; Hopp and Spearman, 2001; Emiliani, 1998; Womack and Jones, 1996; Hay, 1988). This is the key difference with MRP, in which work orders are provided to the system without considering explicitly the state of the system. JIT constitutes a strategic weapon for a company because it results in a more efficient and less wasteful manufacturing system. By following the methodology of JIT, setup times are minimized successfully and frequent changeovers are feasible. Direct results include considerable reductions of lot sizes and Work In Process (WIP) and total system s inventory. The end result is the significant reduction of the total manufacturing cost. Implementation of the Flow and Pull concepts is based on a number of significant methods as shown in Figure 2.1. For example, the implementation of techniques such UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 5 of 132

16 2. Just-In-Time (JIT) Methodology as Total Quality Management (TQM), Total Productive Maintenance (TPM) help in minimizing costly (both in terms of time and costs) rework or loop-backs. Furthermore, in a JIT environment, a) workers should be trained to obtain multifunctional skills and b) machines should be allocated properly to the re-designed manufacturing cells to cope with unexpected fluctuations in demand. Thus, manufacturing cannot reap the benefits of JIT unless the above preconditions exist; i.e. multiskilling and problem solving by workers, elimination of rework etc. In addition, supplier networks must support long-term and mutually beneficial relationships in order to achieve synchronization between supplies and production. The above steps interact with one another and thus, must be achieved following an iterative process that continuously reveals waste and ensures continuous improvement or Kaizen in the system. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 6 of 132

17 2. Just-In-Time (JIT) Methodology Figure 2.1: The JIT Elements UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 7 of 132

18 2. Just-In-Time (JIT) Methodology 2.3. The Pillars of JIT Figure 2.1 summarizes the results of an extensive literature research regarding JIT implementation in manufacturing. This review has shown (as already mentioned above) that JIT is founded on the pillars of: A) Implementation of Flow, and B) Implementation of Pull. Further analysis of these pillars is presented below: Implementation of Flow In order to establish flow in a system, three preconditions must exist, which are discussed bellow: a) Setup Time Reduction The method of Setup time reduction or Single-Minute-Exchange-of-Dies (SMED) comprises five steps: 1. Maintenance, Organization, and Housekeeping. A typical cause of setup problems is poor housekeeping, poor equipment maintenance and incorrect organization of tools. Proper maintenance, organization, and housekeeping are easy to be enforced and result in significant benefits. 2. Separate Internal elements from External and convert them to External. Internal (or mainline) elements are the processes that occur when the machine is not working, while external (or offline) elements are the processes that can be worked out while the machine is operating. The notion here is to convert as many internal elements as possible to external. Chief among internal elements that can be converted to external are searching time looking for the correct die, tools, carts, etc, waiting time for instructions, carts etc, and setting times for setting dies, fixtures, etc. 3. Improve Elements. Examine of each element and try to find methods of eliminating waste. 4. Eliminate Adjustments. A short period of time is required to enforce a new adjustment but a long period of time is required to make this adjustment to function properly. 5. Abolish Setup. This composes the ultimate goal of the SMED method and it could be achieved by either redesigning the products and make them uniform, so the same parts are required for various products or producing various parts in parallel UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 8 of 132

19 2. Just-In-Time (JIT) Methodology at the same time (Black and Hunter, 2003; Hopp and Spearman, 2001; Hay, 1988). b) Quality at the Source Quality at the Source according to JIT constitutes of two main principles: Total Productive Maintenance (TPM), and Total Quality Management (TQM). TPM includes the techniques of preventive maintenance, predictive maintenance, improvement maintenance, and 5Ss maintenance while TQM include standardized work, visual control, poke yoke, and kaizen. Further analysis of these principles is presented in Section 2.5 c) Cellular Layout Cellular Layout is the organization of the manufacturing facility (people, materials, machines, and design) in cells, dedicated or semi-dedicated in product families. Further analysis is given in Section Implementation of Pull The pull production system according to Crabill, et al (2000) is defined as a two subsystem linkage in a supply chain. The producing operation does not produce until the standard Work-In-Process (WIP) between the two sub-systems is less than the set point. When the standard WIP is below the set point, this condition signals the need to replenish. Information flows in the reverse direction from product flow to signal production by the upstream cell or manufacturing process. Pull represents a production system that explicitly limits the level of WIP in contrast to the push production system (Hopp and Spearman, 2001). According to Smalley (2004), three main types of pull systems exist: the replenishment pull system in which production is triggered when the stored end items are consumed, the sequential pull system in which the production rate is regulated according to the demand with the pacemaker to be usually established in the first process step at the beginning of the value stream map, and the mixed pull system, which is the combination of the replenishment and the sequential pull systems. Table 2.1 describes the basic differences between Pull and Push production systems. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 9 of 132

20 2. Just-In-Time (JIT) Methodology Table 2.1: Basic Differences between Pull and Push Manufacturing Pull Conditions Push Conditions The final assembly workstation requests from the upstream cells parts to be produced in order to replenish the inventory (parts are pulled ). Each workstation forwards its producing parts to the final assembly workstation irrespective to the demand (parts are pushed ). As a result - One scheduling point for the overall value stream, thus there is no confusion over the right schedule and everyone is marching to the same beat. Flow of production is fully accomplished (No Setup Time, No rework) As a result - Several scheduling points in the overall value stream, thus confusion over the right schedule. Flow of production is not fully accomplished As a result - Lot sizes are minimized, thus less inventory is required All production processes, machines and workers are organized properly to produce at the rate given by Takt Time: As a result - Orders are produced in large batch sizes, thus more inventory is required to cover breakdowns, delays or forecast mistakes (Black and Hunter, 2003). The production is accomplished irrelevant of the Takt Time: As a result - There is production smoothing and leveling of demand between the manufacturing cells and cycle time is reduced, thus items are paced and built in accordance with demand As a result - The line is not balanced according to demand and items are paced and built irrelevant to the demand. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 10 of 132

21 2. Just-In-Time (JIT) Methodology Pull Conditions No production process begins unless three prerequisites are fulfilled: 1. Demand (available kanban card) 2. Raw material 3. A Free Server Push Conditions No conditions exist for setting out the production process. Orders continue to be added in the system with no limits on WIP. As a result - System s capacity defines the number of the orders (system is not overloaded), thus the WIP is explicitly stated and it is small (a closed queuing network). As a result - Orders are pushed in the system irrespective of its capacity (bottlenecks occur), thus the WIP is alleged and it is large (an open queuing network) (Hopp and Spearman, 2004). In order to implement pull, as it was shown earlier, Flow must be established. After that a series of three additional techniques can be applied in order to realize pull production. These techniques are described bellow: a) Level Production Level or Smoothing Production attempts to eliminate fluctuation in final assembly by eliminating variation or fluctuation in feeder processes. It represents a scheduling technique for balancing a production line by changing a) the production volume; i.e. parts are produced one single-piece at a time, and b) the production sequence of parts. Level production can improve the line performance by specifying which products are to be produced at each time interval. It is often preferred to implement level production firstly in the assembly operations, and secondly to adjust the cycle time to be equal or slightly less than the takt time (see Appendices A.3 and B). The Japanese created a visual scheduling tool called the heijunka box. Heijunka is generally a wall schedule, which is divided into a grid of boxes, each one representing equally established time intervals during shifts which indicate what products and in what quantity should be produced during the corresponding time interval. In this box, daily orders (kanbans) are inserted by production control in order to pull products of UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 11 of 132

22 2. Just-In-Time (JIT) Methodology the right mix and provide instructions to the system about sequential planning. Additional information for leveling the production can be found in the work of Black and Hunter (2003) as well as in A. Smalley s (2004). b) Kanban Technique The lean method of production and inventory control is a pull system widely known as the kanban system (kan means signal and ban means card in Japanese). Kanban cards represent a visual control tool that regulates the flow of materials between cells and aim to respond to demand by delivering parts and products Just-in-Time. Therefore, it is a method of controlling the flow of information between the workstations while eliminating the WIP levels. In general, the kanban method functions as described in the following paragraph: The downstream customer, either internal or external, pulls parts (downstream flow of parts) from the upstream supplier (internal or external) as needed. Empty product containers are a signal (upstream flow of information) for replenishment. The above is accomplished by using different kinds of kanban cards, such as production cards, move or withdrawal cards, signal cards, etc. and it comprises a significant method of production control and controlling levels of WIP. Appendix A describes in detail the most four significant types of kanban systems as well as the existing types of kanban cards. c) Development of Supplier Networks Finally, according to the literature of JIT, supplier networks must be developed. The integration of suppliers seeks to transfer the technological knowledge from the customer to the supplier and convert the latter to a lean manufacturer. As a consequence, suppliers evolve into remote cells in the linked-cell manufacturing system and deliveries are becoming synchronized with the buyer s production schedule. The supplier networks must consist of fewer and better suppliers and the contracts should be long-term and mutually beneficial. The rule here is to create single sourcing supplies for each component or subassembly by certifying the related suppliers. (Black and Hunter, 2003; Wu, 2003; Waters-Fuller, 1995; Hay, 1988). UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 12 of 132

23 2. Just-In-Time (JIT) Methodology 2.4. Cellular Manufacturing The cellular system also known as lean shop with linked-cell design is considered to be a basic component of the lean-production philosophy (Black and Hunter, 2003). Nevertheless, alternative types of manufacturing systems also exist depending on the product characteristics and mix, the type of manufacturing philosophy, etc. The existing layout types are divided mainly into four categories (Tompkins, 1996): The Fixed Product Layout is best applied in low volume production processes with low standardization and stable demand. It is the method of combining all workstations required to produce one product such as an aircraft, ship etc. within the area required for staging the product. A typical characteristic of this facility layout is that workstations are brought to the material since the referred product is usually very large and bulky. The Product Layout is best applied in high volume production processes with high standardization and stable demand. It is the method of combining all workstations required to produce one product with continuous flow processing. Thus, the processing sequence is linear with the products flowing from one workstation to another. The Group Family Product Layout (Assembly Line) is best implemented in medium volume production with medium process standardization. In this case, few products are produced at the same time under varying demand. The products are grouped into families and each family is treated as a pseudo product. Equipment is dedicated or semi-dedicated to manufacturing each family. The Process Layout is more practical in low volume production with low process standardization. In this case, the demand is usually unstable. The production is conducted in batches and identical workstations are combined into departments. In this case what determine the layout is the process and not the product. The Product Layout and the Group Family Product Layout are the two types that mostly fit the lean philosophy. Further analysis of the cellular system is presented in detail in the following paragraphs. Cellular Layout Lean-production cells are designed to operate at less-than-full-capacity. The workstations within a cell are typically arranged in a U-shape for flexibility, so that UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 13 of 132

24 2. Just-In-Time (JIT) Methodology workers may move from machine to machine, loading and unloading them with parts, following the shortest walk distance with the least possible obstacles. In a JIT manufacturing cell, one operator is able to run two, three or more different machines, all performing operations on the same part, moving this part from operation to operation in sequence one-single piece at a time. This is due to the fact that a U-line layout enables the operators to be physically together side-by-side, back-to-back without interrupting, annoying or hindering each other. Figure 2.2: A U-shaped Cellular Layout (source: Hopp and Spearman, 2001) The workstations that perform successive operations are located close to each other, so that products and parts can flow easily from one to another. Moreover, this kind of layout supports flexibility in the number of workers since one worker may operate more than one (and possible all) workstations within the cell. Therefore, the number of workers can be easily adjusted to the demand and to the calculated cycle time (or takt time if the cell is the final assembly station) (see appendix B). However, in order to fully exploit the benefits of cellular manufacturing certain conditions must hold: a) cells must be staffed with multifunctional workers 1, 1 Multifunctional means a worker that can perform various tasks such as setup reduction, operating properly the machines, implementing preventive maintenance and continuous improvement et al. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 14 of 132

25 2. Just-In-Time (JIT) Methodology organized in teams, and b) automation should be an integral part of all workers and other resources within the cell. In order to organize the available machines properly in manufacturing cells one has to fully analyze the product (and part) characteristics and form appropriate part families. There are many methods of cell formation. A typical one is the one presented by Braglia, et al (2006) and includes the following steps: 1. Specify which machines are used by which parts 2. Use the Jaccard similarity function to estimate the similarity of the products via the machine part matrix: S ij X ij + X ij Yij =, (2.1) X + X + X + X Y ij i j ij ij Where 0 S 1, ij X ij = number of machines used by both part i and part j (number of matches), X i = number of machines used by part i only, X j = number of machines used by part j only, Y ij = number of machines that are used neither by part i nor by part j (number of misses). 3. Accumulate the results in a similarity matrix and assemble the follow-on partgroup dendrogramm. 4. Reorganize the machine part-matrix by determining the machine sharing. The norms are: i) the machines that are not shared should be positioned into a cell, in order to accomplish continuous flow processing, ii) for the machines that are shared use the Signal Kanban (see Appendix A). Having formed a cell, capacity or cycle time (or takt time) is adjusted to respond to changes in the customer demand: It is set to produce parts at exactly the rate set by the parent subassembly, no faster or slower. Cellular design results in significant benefits. Reductions in setup times, raw materials, WIP, number of defects; as well as reduction of the cycle time variability. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 15 of 132

26 2. Just-In-Time (JIT) Methodology As a result, quality is improved and total manufacturing costs are reduced. Finally, a smoother and faster flow of products through operations is achieved Quality at the Source The implementation of Quality at the Source techniques aim to reduce significantly manufacturing costs (e.g costs occurring by the shorter life cycle of the machines, major equipment repairs, etc) while upgrading the quality of the products at the same time. As referred previously, Quality at the Source rests on two principles: a) the Total Productive Maintenance (TPM), which aims to preserve and enhance equipment reliability, and b) Total Quality Management which focuses on qualitative management by fostering an overall environment supportive of quality improvement. Below are described the tools of TPM and TQM. The techniques of achieving TPM focus on: Preventive Maintenance which is the scheduled maintenance to avoid breakdowns, Predictive Maintenance which is the prediction of pending machine breakdowns, and appropriate intervention to prevent them Improvement Maintenance which is the upgrading of a workstation to prevent a problem before its reappearance, 5 Ss maintenance: the Seiri, Seiton, Seiso, Seiketsu, and Shitsuke. Seiri is the segregation of unnecessary tools from the necessary and the elimination of what is not needed. Seiton is the process of arranging the tools in the production space in a way that simplifies access and use. Seiso is the process of daily cleanliness, which enhances the quality level. Seiketsu is the frequent revisiting and the standardization of the above three steps. Shitsuke is the motivation to sustain and the promotion of adherence through visual performance measurement tools. (Crabill and Harmon, et al, 2000; Womack and Jones, 2003). The techniques of TQM focus on the following: Standardized Work is attained by applying the takt time (see appendix A) to the final assembly. This is accomplished by defining the sequence of the processes UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 16 of 132

27 2. Just-In-Time (JIT) Methodology and tasks, designing properly the cell and establishing the minimum number of pieces (stock-on-hand) needed to maintain a smooth flow of work so that the cycle time to be equal or slightly less than the takt time (Black, Hunter, 2003). Time studies and work methods techniques are used to determine the minimum amount of work needed to perform a task. Process standardization is applied to expose problems and motivate their solution by implementing new methods. In this manner, inherent sources of variation are eliminated. Visual Control is referred to the design of a production system that controls itself by clearly identifying where the problems are, and by creating a sense of urgency wherever is necessary. In particular, visual means of control should be designed in order for each worker to assume actions for maintaining the control of the production system (Crabill, et al, 2000). Autonomation is one example, in which andon light systems are installed to warn the workers when a problem occurs, or even stop the machines if necessary. Kanban cards and the heijunka box represent other visual control means to inform the system at any time about the level of WIP, the rate of the production process, the production targets, etc. In summary, visual control establishes the means to visualize whether the state of the system is within acceptable limits, and to pinpoint waste (Crabill, et al, 2000). Poka Yoke (or mistake proofing) is a device or a process for defect prevention that aims to avoid errors in the receiving of orders or in the manufacturing process. The whole idea is to produce zero defective products by using the poka yoke, a bunch of small devices that are used to either detect or prevent defects from occurring in the first place. An example is a beam of photocells on the material boxes along an assembly line that blocks the product flow to the next step if some components are missing. If the beam of cells is not switched off in each container that contains each part of the product, the flow of the product towards the next workstation is blocked. Kaizen (or Kaizen Event (Blitz)) is a Japanese term meaning continuous and unending improvement in the processes in order to eliminate waste and to enhance value. Kaizen operates mainly in two levels: a) in an on-going process of identifying opportunities for improvement and b) in short-term projects (Kaizen Event). The kaizen technique aims in reducing non-value added activities such as setup times, unnecessary transport of materials, etc. This kind of improvement is mainly attained by training properly the employees in order to obtain problem UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 17 of 132

28 2. Just-In-Time (JIT) Methodology solving skills and thus, to be able to identify and implement potential improvements (Womack and Jones, 2003; Crabill, et al, 2000). The frequent and scheduled implementation of the above quality at the source techniques has long-term benefits. Operators are more recognizable with production equipment and pending problems. The application of visual controls improves the quality of the products since processes are in better control. Consequently, system s reliability, flexibility, and capability are improved by eliminating the level of WIP at the same time and by extension the total manufacturing costs. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 18 of 132

29 3. An Overview of Financial Services 3. An Overview of Financial Services This chapter overviews financial services and identifies specific characteristics of both services and financial services. By defining those characteristics, one may determine the differences between other services and FSs and distinguish the differences of FSs vs. manufacturing. This comparison is a prerequisite in determining proper adjustments of the JIT techniques to FSs. Before starting this analysis, it is useful to present a definition of FSs. According to Meidan (1972), Financial Services are defined as activities, benefits and satisfactions, connected with the sale of money, that offer to users and customers financial-related value. FSs are provided by the finance industry, which includes a wide variety of institutions such as banks, investment companies, insurance companies etc, and aim to the sale and management of the money Characteristics of Services Services have distinct characteristics from manufacturing. These characteristics are classified in four areas: Object of Transformation, Service Production, and Service Output. Object of transformation refers to the customer, the information, and the materials, with information being the dominant object in services. Service production refers to the interaction with the customer and the production process. Finally, by using the object of transformation and by taking under consideration the customer requirements the service output is produced. Object of Transformation 1. The objects of transformation in FSs are the customers, the information, and finally the material. According to Apte et al. (1999), financial services such as banking, insurance etc. are widely known as information intensive services due to the fact that are characterized by information intensity. Information intensive services mainly involve gathering, elaboration, and propagation of information. Service Production 2. Server dependence represents another characteristic of services, since in most cases the server is required in order to a service to be produced and the service UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 19 of 132

30 3. An Overview of Financial Services performance depends on the skills and attitudes of the performer (Apte et al, 1999). 3. Customer Participation. In most services the customer also has significant participation and is able to intervene in the entire provision process of the service, as well as to the nature of the output. The level of the customer participation affects the level of uncertainty. This may happen due to incomplete or missing information required to perform a task. 4. Insepararability characterizes the simultaneity of production and consumption. Difficulties exist in managing the customer-performer interface since both of them participate intensively in the production process. Therefore, effective communication is a prerequisite for the successful completion of the process and the avoidance of uncertainty (Lievens and Moenaert, 2001). 5. Perishability is referred to the nature of the produced products. The inseparability of the production and consumption lead to the logical consequence that services cannot be stored and kept in stock due to the fact that by the time the service production process has finished, the product-service has already been consumed by the customer (perishability in the result of the process) (Lievens and Moenaert, 2001). Service Output 6. Intangibility is another specific characteristic that distinguishes services from manufacturing. The service effectiveness is directly depended on the servercustomer communication, and, by extension, on the degree of intangibility of the service. Thus, uncertainty as regard to intangibility is contingent upon the ambiguity in the relationship between the service provider and the customer (Lievens and Moenaert, 2001). 7. Heterogeneity largely characterises the nature of services. The customer s involvement renders unfeasible the standardization of the output. The wider the human involvement in the servicing and delivery process, the higher the potential for heterogeneity in quality since different technical and interpersonal skills are UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 20 of 132

31 3. An Overview of Financial Services required for the provision of the service (Daft and Weick, 1984; Moenaert and Souder, 1990a; Mahajan et al., 1994) Types of Financial Services We distinguish two approaches in classifying FS. The first approach is due to Harrison (2000), which classifies FS as direct and indirect services. The second approach is based on the Standard Industrial Classification Code or North American Classification System (NAICS) ( Bellow we provide essential information on each approach in order to identify the existing types of FSs. The classification of FSs according to Harrison is the following: Table 3.1: Classification of the Types of the FSs. # Direct financial services Indirect financial services 1. Loans Cash Accessibility 2. Investment Services Asset Security 3. Insurance Services Money Transfer 4. Pension Services Deferred Payment 5. Real Estate Services Financial Advice A more detailed table can be found in Appendix C The term direct refers to the final product-service that a financial institution offers and a customer is motivated to purchase, while the term indirect refers to the services that are indirectly offered during the purchase of the final product-service without further payment. For example, the process of a loan provision includes both direct and indirect FSs. The loan, which is the final product-service that a client purchases, represents the direct FS. However, the provision of such a direct service involves financial advice for the selection of a product as well as the possibility for deferred payment. These represent the indirect FSs. The classification of FSs according to NAICS is summarized in Table 3.2: UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 21 of 132

32 3. An Overview of Financial Services Table 3.2: Classification of the Types of the FSs according to NAICS 1. Financial products 2. Related services 1.1 Financing products 2.1 Spot trading of commodities 1.2 Brokering and dealing products 2.2 Reselling services for merchandise, retail 1.3 Financing related to insurance 2.3 Securities information products 1.4 Trading securities and commodity 2.4 Databases and other collections of contracts on own account customer information 1.5 Account and cash management 2.5 Rental or real estate products 1.6 Products supporting FSs 2.6 Real estate appraisal services 1.7 Insurance Products 2.7 Safe deposit boxes 1.8 Financial system regulatory products 2.8 Tax preparation and representation services 2.9 Electronic tax payments 2.10 Payroll services 2.11 Legal services for wills, estates and trusts 2.12 Notary public service 2.13 Notary and accounting support products for funds 2.14 General administration of companies 2.15 Collection of delinquent accounts 2.16 Formulation and implementation of economic policy The detailed table can be found in Appendix C NAICS classifies FSs into two main categories, 1) financial products and 2) related services. The financial products are services that involve the collaboration of the customer and the provider. Both participate intensively in the production process. On the other hand, the related FSs are minor services that a provider offers to a customer. These services support the main FS provision and aim at offering a greater level of satisfaction to the customer. Further details as well as definitions for each type of FSs are provided in Appendix C. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 22 of 132

33 3. An Overview of Financial Services 3.3. Types of FS Providers The above types of FSs are provided by a wide variety of institutions that qualify as financial institutions. According to the categorization of the US statistic agency, FSs providers are grouped into two categories: the Authorized Deposit-taking institutions (ADIs) and non-adis financial institutions. The ADIs are financial corporations that are authorized under the Banking Act of 1959, and the non ADIs ( Further analysis is presented in Table 3.3: Table 3.3: Classification of the Types of the FS providers 1. Authorized Deposit-taking 2. Non Authorized Deposit-taking Institutions (ADIs) Institutions (Non-ADIs) 1. Banks 1. Securitizers 2. Building Societies 2. Finance Companies 3. Credit Unions 3. Money market corporations (merchant banks A more detailed table can be found in Appendix C 4. Life insurance companies 5. General insurance companies 6. Superannuation and approved deposit funds 7. Public unit trusts 8. Friendly societies 9. Common funds. 10. Cash management trusts In the ADIs mainly belong banks, building societies as well as credit unions while the non-adis include a wider variety of FSs. The ADIs function according to prudential standards and guidelines that were determined by the Banking Act in contrary to the non-adis. Further description of this classification of the FSs providers as well definitions of each type are presented in Appendix C. UNIVERSITY OF THE AEGEAN DeOPSys Lab Page 23 of 132